Monday, April 6, 2009

Bed and Breakfast capital at Bramdean Alternatives

I keep an eye on Bramdean Alternatives – the listed fund of hedge funds and private equity funds run by Nicola Horlick’s Bramdean Asset Management.

What really interests me is the capital calls on private equity – these being numbers large enough to potentially bankrupt Bramdean Alternatives.

So far the capital calls have been manageable – but detailed disclosure about how large they are and when they are due is not available. Without that disclosure I am inclined to think the worst.

Anyway the February "factsheet" contains the following gem (emphasis added):

Four capital calls were received from underlying Funds in February, though one of these was purely for regulatory capital purposes and was refunded the same day. Revaluations were received from two managers of the Company's Private Equity and Specialty Funds and these have been incorporated into the February NAV calculations. Both revaluations were downwards revaluations, reflecting falls in the values of market comparables and adverse currency movements. As stated in previous communications, downward valuations are to be expected given the exceptional market environment and it is likely that the Company will receive further fair market valuation write-downs, including valuations as at 31 December 2008, from some of its managers. As at February, six of the 18 private equity and specialty managers have reported their December 2008 year-end valuations; these have been reflected in the NAV of BAL. One other manager's portfolio is revalued every month.

The first sentence just leaves me gobsmacked. Bramdean sent a whole lot of money – a capital call – to a private equity fund (or other fund) – and they sent it back the same day – after presumably including it in their accounts.

This was done for "regulatory purposes" – but – for the life of me – I cannot think what the regulatory purpose might be – and why this might be legitimate.

If it was to fool a regulator or a creditor into believing that the fund had adequate capital on balance date it looks and smells like it was designed to mislead or at least to circumvent some kind of regulatory test.

But it could be another reason – it is just that I can’t think of any real reason why a fund of funds would send its money to some underlying fund for just a few hours without a design on fooling someone. I sent an email to Bramdean hoping that they might give me a legitimate reason but alas there was no reply.

And I am not picking on Nicola Horlick here. If Bramdean sends the capital and it comes back on the same day the fund presumably sent this request to several funds-of-funds – and they all complied. And they all didn’t think it unusual that their money might be needed for a few hours.

So to repeat the question. Can anyone think of a legitimate purposes for this?

Please.

John

ps. If you want to spot me a few million dollars for a few hours - then - I am interested. I just can't think of any legitimate reason why you would want to do that either.

5 comments:

But What do I Know?
said...

Oh, and if you can find that person to give you $100 million for a few hours, can you pass their name along :>) Seriously, this is a good point and I would really like to know if someone comes up with a legitimate reason.

The transaction could have more to do with meeting bank covenants rather than regulation - banks have hair triggers on these things just now and the consequences of not meeting them are very expensive.

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